ATLANTA - Any hope that the nation's tobacco wars would end when the largest cigarette manufacturers and 46 states signed a landmark legal settlement ten years ago this month has long since dissipated.

New companies spark conflict over tobacco settlement agreement120308
HEALTH1Morris News Service ATLANTA - Any hope that the nation's tobacco wars would end when the largest cigarette manufacturers and 46 states signed a landmark legal settlement ten years ago this month has long since dissipated.

ATLANTA - Any hope that the nation's tobacco wars would end when the largest cigarette manufacturers and 46 states signed a landmark legal settlement ten years ago this month has long since dissipated.

Yes, the largest legal battle has ended and smoking rates have declined in the wake of the massive deal, in which the tobacco companies agreed to pay the states billions of dollars in perpetuity to settle claims that smoking-related illnesses had caused huge health-care bills that strained state budgets.

But other fights rage on. Anti-smoking advocates are outraged that some states have used many of the proceeds to fund economic development needs or plug budget holes rather than bankrolling aggressive campaigns to persuade Americans to kick the habit.

And the tobacco companies and states have waged a battle to crack down on small manufacturers whose market share blossomed in the wake of the price increases caused by the settlement. Some of those smaller manufacturers are lashing back, attacking the agreement as unconstitutional and filing a federal lawsuit to have it thrown out.

The initial growth and recent decline of those "non-participating manufacturers" provides a case study of how, in some cases, the master settlement agreement was only a tentative step toward ending the legal struggles over the role of tobacco in American life.

New players

David Redmond had been selling low-cost cigarettes in countries like Russia for about five years when the first effort to settle state claims against the tobacco companies was put before Congress, which needed to approve the first version of the agreement. When that measure failed, the states and companies retooled the agreement to bypass Congress.

By then, Redmond had prepared a business plan for the United States. In 1999, he launched Carolina Tobacco Company, hoping to take advantage of the price increases caused by the master settlement agreement.

Redmond decided not to sign the master settlement because the basis of the claims against the big tobacco companies - a pattern of public deception and efforts to market tobacco to young people - didn't apply to Carolina Tobacco, which hadn't been in the American market until after the agreement was signed.

"Therefore, we felt and I felt very strong that it was an admission of guilty to sign the master settlement agreement," Redmond said.

He didn't.

He wasn't alone. Between 1998 and 2007, the market share of non-participating manufacturers has surged from 0.5 percent to 5.7 percent, said Bill Phelps, a spokesman for Altria, the parent company of Philip Morris USA, creating a new reality in the industry.

"It's more competitive now than it was in 1998," Phelps said.

Escrow statutes

But Redmond was also aware of a provision in the master settlement agreement that would affect his ability to compete in the American market - so-called "escrow statutes," which require Carolina Tobacco and other non-participating manufacturers to pay into an escrow amount roughly the same amount of money per pack as tobacco companies that did decide to join the agreement.

That didn't mean Redmond agreed with it.

"The idea of an escrow for non-participating companies that were not involved in the tort action, not involved in misadvertising, I think is a travesty," he said.

In fact, Redmond said, his company goes out of the way to avoid some of the same behaviors for which state attorneys general and lawmakers hammered the tobacco companies in the years leading up to the settlement. His ads only appear in trade magazines, for example, and there are none of the colorful cartoon characters like Joe Camel that critics said were targeted at youths. Joe Camel and his ilk were banned in the settlement agreement.

At first, companies like Redmond's could recoup some of the money paid into the escrow accounts relatively quickly. But states then changed their laws, and the full payments now sit in escrow for 25 years unless a state decides to

pursue a legal claim against the manufacturer. That removes much of Redmond's original advantage in keeping down his costs. Now, he opts to keep his company lean.

"Why should a new company like ours, entering the market, have to pay the same penalty as a misbehaving company?" he asks.

Controversy over payments

The answer is complicated.

Non-participating manufacturers say the only reason they are required to make the escrow payments is to artificially increase their prices, preventing them from undercutting the prices of tobacco manufacturers who have signed onto the agreement.

"Effectively, it's a penalty for not agreeing to limit your lobbying, advocacy and advertising. You pay whether you join or you don't join," said Hans Bader, counsel for special projects at the Competitive Enterprise Institute. Bader is representing a non-participating manufacturer, a cigarette distributor, a retailer and a smoker in a federal lawsuit challenging the agreement.

Similar lawsuits have been turned away by the courts.

Manufacturers who did sign onto the agreement say it's not that simple. Phelps declined to answer questions about whether non-participating manufacturers have an unfair advantage over companies like Philip Morris.

But a briefing book distributed by the company to reporters says the reason for the escrow statutes is not necessarily to level the playing field. For one thing, non-participating manufacturers only have to put in escrow an amount equal to how much of the settlement payments are based on health-care cost, not any of the other claims settled by the agreement

"The escrow funds were established to ensure that funds are available to satisfy state claims, such as for health-care costs, in the event a state obtains a judgment at some point against the NPM, which has not settled with the state and thus has not been released from such claims," the book says.

A difference

Bader says those judgments will probably never happen. In most of the states involved, he said, the company would have to do something else wrong other than sell a product that can cause health problems. The non-participating manufacturer would have to be guilty of the kinds of fraud and abuse that caused the tobacco companies to face a lawsuit in the first place.

"In most states, there's no general right to sue companies because their products raise health-care costs," Bader said.

Redmond said his company he's careful not to deceive anyone about the dangers of tobacco, making certain he avoids the ethical lapses he says laid the groundwork for the agreement in the first place.